Shulou(Shulou.com)11/24 Report--

It's easier to sell a car than to make money? The strange circle in which it is difficult for new energy vehicles to make profits is being broken.

On January 30, BYD issued a preview of its 2022 results. According to the performance forecast, BYD expects its annual operating income to exceed 420 billion yuan in 2022, realizing a net profit of 16 billion yuan to 17 billion yuan belonging to shareholders of listed companies, an increase of 425.42% and 458.26% over the same period last year.

In 2022, when it was announced that it would stop producing fuel cars, BYD's net profit soared, surpassing the scale of 10 billion for the first time in more than 20 years.

Just a few days before BYD issued the performance forecast, Tesla also handed over the best report card in history. According to the financial report, Tesla's total income reached US $81.5 billion in 2022, an increase of 51% over the same period last year, with an operating profit of US $13.7 billion and a profit margin of 16.8%.

No more than I don't know, I was shocked. In 2022, the profit margin of China's auto industry was only 5.7%, according to the Federation of passengers. Horizontal comparison, Tesla's ability to make money is astonishing.

For a long time, it is a common phenomenon in the industry for new energy car companies to "increase income and not make a profit". Whether it is the head car-building new forces "Wei Xiaoli", or the second-line car-building new forces running zero, United, and so on, almost all of them are in a state of loss.

"the more you sell, the more you lose," and many people question the profitability of new energy vehicle companies. Wei Ma CEO Shen Hui once said bluntly that new energy car companies can no longer rely on burning money to pursue sales, and the road of trading losses for sales will not work.

In 2022, when there was a lack of core and expensive electricity, BYD and Tesla handed over their best results in history, which not only shattered the claim that new energy car companies were not making money, but also set an example for other market participants.

What kind of process did Tesla and BYD go through on their way to profit? What are the common reasons behind the profits of the two? These are the questions that this article tries to answer.

1. A crazy nightmare can electric cars make a profit? Since its establishment in Silicon Valley in 2003, this issue has been like a "sword of Damocles" hanging over Tesla's head.

At that time, the market scale of new energy vehicles was small, and the industrial chain was not yet sound. Many Wall Street analysts believe that Tesla will fail from every point of view, and profitability will be the biggest challenge for Tesla.

Later, it turns out that this worry is not unreasonable.

Since R & D shifted to the production of its first electric car, the Roadster, Tesla has been caught in a "mole problem": difficulty in painting the carbon fiber body, failure in the transmission system, and the inability of the Thai battery factory to complete the production task, one difficulty after another. The emergence of these problems eventually leads to the high production cost of Roadster.

In Musk's words, Tesla made all kinds of embarrassing mistakes, which was a crazy nightmare.

In 2008, Tesla, who overcame many difficulties, began to deliver the Roadster, which was praised by celebrities. However, due to the small scale of mass production and limited economic benefits, Roadster did not help Tesla make a profit, and Musk nearly sold Tesla to Google because of financial problems.

In order to save Tesla, Musk had to raise funds again through various channels on the basis of insisting on his own capital investment in the early stage. At that time, Musk's wife, Riley, even regarded Musk's life as a Shakespeare tragedy.

In 2010, Tesla listed on NASDAQ in the United States to "quench his thirst" for scarce funds. At the time, Tesla promised management to be profitable in 2013. However, the reality dealt a heavy blow to Tesla.

In 2012, Tesla launched the Model S sedan. The model is positioned at the middle end, the price is significantly lower than that of the Roadster, and sales have doubled.

Relying on the hot sales of Model S, Tesla made a net profit of US $11.2 million from January to March 2013, making a quarterly profit for the first time in history, but this situation did not last long.

With the listing of Model S, Model X and Model 3 models, Tesla achieved large-scale mass production, but the rapid growth of revenue did not push Tesla out of the loss quagmire.

In 2018, Tesla Model 3 model production capacity failed to meet the target, lack of funds and other news frequently reported, Tesla will be the news of bankruptcy again.

The Wall Street Journal quoted Tesla's memo to a global supply manager as saying that "Tesla asked some suppliers to return the money they had previously paid to help them make a profit."

Bob Lutz, a former vice president of GM, even said in an interview that "Tesla is about to close down and will not be able to last until 2019."

The tenacious Tesla did not raise his hand to surrender. By strictly controlling costs, opening the Shanghai super factory and other ways, Tesla came out of the capacity crisis dangerously and dangerously.

In 2020, Tesla made a full-year profit for the first time with a net profit of $721 million, thanks to hot sales of Model 3 models, which was also rated as "landmark" by the outside world.

For the whole of 2021, Tesla achieved revenue of US $53.82 billion, an increase of 71% over the same period last year, and the net profit attributable to shareholders was US $5.52 billion, an increase of 665% over the same period last year.

Such a profit performance finally let Tesla breathe a sigh of relief. "2021 is a breakthrough year for Tesla, which means that there is no longer any doubt about the feasibility and profitability of electric vehicles."

2. Waiting for the outbreak, Tesla was founded in 2003. This year, the "battery king" Wang Chuanfu also officially announced the construction of a car.

Like Tesla, BYD was also plagued by profit problems for a long time before 2020.

In 2008, BYD developed the first new energy vehicle, F3DM, and became the first person to eat crabs in China's new energy vehicle market. In 2015, BYD's new energy vehicle production surpassed Nissan and Tesla to become the top seller of new energy vehicles in the world.

Although the sales of new energy vehicles are rising year by year, BYD has been unable to get rid of the question of poor profitability.

Take the 2019 data as an example. That year, BYD sold about 220000 new energy vehicles, with pure electric models up 42.5 per cent from a year earlier. However, in terms of profits, the net profit belonging to shareholders of listed companies is only 1.612 billion yuan, down 42.03% from the same period in 2018.

Subsidies for the decline of the slope, lack of brand strength. There have been various interpretations of BYD's unprofitable income, but BYD founder Wang Chuanfu never seems to be moved.

On the one hand, Wang Chuanfu firmly believes in the development prospects of the new energy vehicle market. In his view, with the continuous growth of sales in the new energy market, the resulting economies of scale will effectively reduce costs and make new energy vehicles more cost-effective than fuel vehicles.

On the other hand, in the initial stage of car construction, BYD introduced the vertical integration model of the industrial chain. In the early stage, the vertical supply chain system is bound to require huge R & D investment. However, once this system is completed, it will not only ensure that BYD's production will not be affected, but also enable BYD to form cost, efficiency and technological advantages, share costs and improve profitability through a high degree of business integration.

In 2021, BYD finally ushered in the market spring breeze. In the case of rising oil prices, many consumers for new energy vehicles from "license plate demand" to "money-saving demand", plug-in hybrid market ushered in the outbreak.

In this context, BYD launched the fourth generation hybrid technology DM-i, with Qin Plus, Song Plus, Tang, Han and other models listed one after another. At the same time, the core technologies such as blade battery and CTB battery body integration also gradually fell to the ground, and BYD became popular at once.

According to the financial report, BYD achieved an operating income of 216.142 billion yuan in 2021, an increase of 38.02% over the same period last year; the net profit attributed to shareholders of listed companies was 3.045 billion yuan; and the net cash flow generated by operating activities was 65.467 billion yuan, an increase of 44.22% over the same period last year.

As Li Yunfei, general manager of BYD's brand and public relations department, said: "profit performance is just a result. Behind this, it is the technology and products accumulated by BYD that have ushered in an explosive period."

3. Wading out a new road because of heavy assets and heavy investment, a large amount of "burning money" at the initial stage of starting a business is a common feature of the new energy automobile industry. In the process, some people burn out a new world, while others burn with the fire.

What can not be ignored is that after the stage of "burning money for the market", the leading enterprises in the new energy automobile industry have gradually stepped out of losses and waded out a road of profit. Che Bai think Tank believes that behind the profits of Tesla and BYD, there are three things in common that deserve attention.

First, scale effect. The automobile industry is regarded as one of the most typical economies of scale industries. The huge capital investment in the development of production equipment and technology in the automobile industry inevitably requires manufacturing enterprises to have sufficient scale in order to achieve production benefits.

A research report by Tianfeng Securities shows that when sales reach a certain critical point, the profit elasticity will be significantly enlarged.

Research by Tianfeng Securities found that when Tesla's quarterly sales exceeded 10, 20 and 300000 vehicles, the net interest rate of bicycles changed from negative to positive, from 5% to 10%, and from 10% to 15%. It can also be seen that when BYD's quarterly sales exceeded 20 or 300000 vehicles, bicycle profits also increased significantly, ushering in a critical moment from quantitative change to qualitative change.

Second, cost control. Tesla has always been called a "cost killer". One of the most direct proof is that after several price cuts in 2022, Tesla's gross profit margin fell by only 2% in the fourth quarter, to 25.9% from 27.9% in the previous quarter.

In Tesla's view, in this period of macroeconomic uncertainty, high interest rates and deflation in vehicle prices, special attention should be paid to the manufacturing costs and benefits of vehicles. Therefore, in the 2022 financial report, "cost control" was mentioned by Tesla to a vital position.

Tesla's financial report shows that Tesla's team is speeding up cost control planning and digging for higher production efficiency. Between 2017 and 2022, the average price of Tesla's electric car halved, but its operating profit margin continued to rise. The increase in operating profit margin is mainly due to the introduction of lower-cost models, the construction of more efficient local chemical plants, lower vehicle costs and operating leverage.

Take the integrated die-casting technology that Tesla has always advocated as an example, the application of this technology can reduce the number of parts in the manufacturing process and reduce manufacturing costs by 40 per cent.

The same goes for BYD. Thanks to the self-research strategy adopted in the field of core components such as semiconductors and batteries, BYD has effectively avoided the rising cost pressure caused by rising raw materials and chip shortages and retained more profit space. In the context of the epidemic and the re-division of the international supply chain, the advantage of BYD's vertical integration is more prominent, and it has stronger control over upstream costs and production capacity.

Third, the price of bicycles. In the past two years, the cost of batteries and chips has risen all the way, offsetting the profit space of the vehicle terminal. Especially for middle and low-end models, the cost pressure is more serious. Upgrading to the middle and high-end markets with higher profits has become the only way for new energy vehicle companies to make profits.

Zhang Yongwei, vice chairman and secretary-general of China Electric vehicle Association, said that in 2023, with the price of pure electric models moving up and mixed models falling, the electrification of mid-range models has made rapid progress. Combined with the analysis of vehicle supply and vehicle life cycle cost and other factors, it is expected that mid-range models will accelerate penetration, and the sales structure of new energy vehicles will continue to be optimized from dumbbell to spindle.

In fact, the middle and high end market is the key to the layout of BYD and Tesla.

Statistics show that at present, the price of BYD bikes has risen to 190000 yuan from 150000 yuan in 2021. With the development of "Dynasty + Ocean", the middle and high-end model matrix of BYD will continue to improve, further expand the target market and upgrade continuously.

At Tesla's earnings meeting, Tesla's CFO Zakary Kirkhorn also said that although Tesla has experienced many price cuts, the average price of Tesla's bike will still exceed 47000 US dollars (about 318600 yuan) in 2023, which shows the attractiveness of this market to Tesla.

To some extent, the story of Tesla and BYD proves that although the road to profitability of new energy car companies is fraught with thorns, it is not impossible. After the capital attention and the bombardment of public opinion, those companies that do not take financing as the purpose, "seriously crazy" to build products still have a chance to win.

[full text reference]

[1] "New energy doesn't make money? The price of immaturity ", Autobots, Huang Yaopeng

[2] "the inflection point of profit and loss of new energy vehicles", electric vehicle observer, Zhu Shiyun

[3] "Tesla: the darkest hour of 2008", Luo Shi Business Review

[4] "Tesla crisis past", Tech diagonal, Beiwang

[5] "net profit pre-increased more than fourfold:" Global Top seller "BYD earned more than 16 billion yuan in 2022", 21st Century Economic report, Song Doudou

[6] "after six months of collective price increases, it is still difficult for new energy car companies to get out of the quagmire of losses", Economic Observer, Zhou Ju, Hu Yaodan

[7] "Why doesn't BYD make money? ", Electric Union, Mr. Dongguan University

[8] "Special Analysis of Electric vehicle Industry: how do you define the valuation of electric vehicles at the current time? ", Tianfeng Securities, Sun Xiaoya

This article comes from the official account of Wechat: che Bai think Tank (ID:EV100_Plus), by Cheng Honghe.

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